SYDNEY, Aug 22 Asian markets were under the cosh
on Thursday as a spike in U.S. bond yields drove up borrowing
costs globally, and even surprisingly strong data from China
couldn't completely staunch the bleeding.

Emerging markets again bore the brunt of the selling as many
have come to rely on cheap dollars to underpin domestic demand
and fund current account deficits. The currencies of Indonesia,
Malaysia and Thailand all hit multi-year lows, while the Indian
rupee ploughed another historic trough.

Their stock markets likewise all fell between 1 and 2
percent, while the MSCI index of Asia-Pacific shares outside
Japan shed 1.1 percent to a six-week low.

Japan's Nikkei fared somewhat better with a loss of
only 0.4 percent, while Shanghai was uscathed thanks to
an upbeat reading on Chinese manufacturing.

Early indications were that European shares would also start
weaker, though only modestly as yet. Both Eurostoxx 50 futures
and DAX futures were off 0.2 percent.

Driving the flight of funds were minutes of the Federal
Reserve's July policy meeting which showed it was still on track
to start tapering stimulus as early as next month.

That sent 10-year U.S. Treasury yields up as far
as 2.93 percent, highs last seen in July 2011. The break of a
major chart bulwark at 2.90 percent could next see a test of 3
percent -- a major psychological marker.

Treasury yields tend to set the benchmark for borrowing
costs across the globe, so the rise will make it more difficult
for indebted countries and companies to pay their bills.

Expectations of economic recovery in the United States and
Europe also tends to make assets there more attractive,
heightening the competition for global savings.

"Given that the recent capital outflows have been mainly
triggered by yield differentials, the higher Treasury yields
mean that there is unlikely to be a quick turnaround in Asian
currencies, especially those economies with current account
deficits," said Frances Cheung, a strategist with Credit
Agricole in Hong Kong.

She listed India, Indonesia, Malaysia and Thailand as the
most vulnerable. "The story about capital outflows could persist
for a while."

India's rupee promptly slid past 65.00 per dollar
for the first time ever, while the Indonesian rupiah hits its
lowest since 2009.

CHINA HOPES

The rout in emerging markets overshadowed better news from
China, though the chance of a pick-up in the world's second
largest economy could prove much more important in the long
term.

HSBC said its preliminary purchasing managers' index for
China rose to 50.1 in August, a five-month high and just above
the 50 level that separates growth from contraction.

"We expect further filtering-through, which is likely to
deliver some upside surprises to China's growth in the coming
months."

That would be a big change given many had felt all the risks
up until recently had been for a hard landing.

It was enough for Shanghai shares to recoup all their early
losses to trade a whisker firmer.

Also helping was a Reuters poll showing Japanese
manufacturers' optimism improved to the highest level in three
years, as a weak yen boosted earnings for exporters of textiles,
chemicals, steel and other metals.

The upbeat Chinese news also helped lift the Australian
dollar almost half a cent to $0.8990. Around 70 percent
of Australia's exports go to Asia and its currency is free-
floating and liquid, so investors often use it as a proxy
against emerging market risk.

The prospect of further increases in U.S. yields gave the
U.S. dollar a modest lift against other major currencies. The
euro was back at $1.3340, from a high of $1.3452 on
Wednesday, while the dollar pushed higher to 98.22 yen.

The dollar index, which measures it versus a basket of six
currencies, rose to 81.495, from a low of 80.896.

Industrial commodities rallied in the wake of the Chinese
data, with copper up 1.3 percent at $7,336.50 a tonne.
Gold, more bothered more by the risk of Fed tapering and rising
bond yields, backtracked to $1,362.96 an ounce.

U.S. crude oil futures were off just 5 cents at $103.80 a
barrel, while Brent crude oil eased 29 cents to $109.52
.

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